3 key recommendations to stimulate South Africa’s economy

South Africa’s government has committed billions of rands in Covid-19 related fiscal support and stimulus packages to the unemployed, small businesses, and struggling sectors in an effort to save livelihoods, which has deepened its debt challenges, notes think tank, The Brookings Institution.

Authors of chapter 1 of the Foresight Africa 2021 report, Haroon Bhorat and Gracelin Baskaran, point to at least three key responses needed to stimulate an economic recovery.

The research focuses on strategies for Africa to confront the twin health and economic crises created by the Covid-19 pandemic and emerge stronger than ever.

The authors noted that although South Africa’s pre-pandemic forecast for debt-to-GDP ratio for 2020 was already high at 65.6%, supporting the economy through the pandemic required the government to breach the spending ceiling and expand its borrowing—raising the forecast ratio to 80.5% for 2020.

“The strain of higher debt can significantly damage a country’s long-run growth prospects: Indeed, a study by the World Bank found that in emerging markets, the loss of annual real growth is 0.02 percentage points for each percentage point over a 64% debt-to-GDP ratio,” they said.

Change in GDP and employment, South Africa

While the pandemic caused many South African industries—both in their output and employment—to shrink from Q1 to Q2, the economy’s different sectors were not hit evenly, the report found.

Stimulating economic recovery, the authors said, requires the following responses:

  • Strengthening confidence in the country’s ability to adhere to a fiscal consolidation path;
  • Improving the efficiency of expenditures; and
  • Strengthening revenue mobilisation.

“First, South Africa must restore confidence in its proposed fiscal consolidation path,” the report stated. The authors noted Moody’s recent downgrade to below investment grade.

This move, they said, put pressure on domestic capital markets and reduced confidence in the South African economy, manifested in higher bond yields, exchange rate depreciation, and by extension, increased borrowing costs.

“As a result, the fiscal consolidation path presented in the most recent budget for 2020/2021 has been met with scepticism from the market.”

“Indeed, the President’s Economic Advisory Council noted that the fiscal consolidation path suggested by the government is neither desirable nor believable,” they said.

Paramount to recovery will be the government’s ability to deliver on the proposed structural reforms, while also reducing the public wage bill.

“Second, critically, leaders must improve the efficiency of existing expenditure. Despite a rate of investment above the long-term rate, owing largely to significant public investment in state-owned enterprises, the efficiency of investment has deteriorated significantly,” the authors said.

Citing the top 100 emerging and developing markets, the research note showed that South Africa’s capital output ratio now lags behind 82% of its peers, suggesting a growth in wastage, corruption, and inefficiency in spending by the fiscus.

Thirdly, South Africa must strengthen its revenue mobilisation. “Given the year of economic hardship for firms and households, it is not feasible to raise taxes. Even before the crisis, tax revenue shortfalls were a recurrent theme in South Africa,” the authors said.

The National Treasury’s Budget Review 2020 noted that, although there have been large tax increases over the last five years, the gap between projected and collected revenue has continued to expand.

“Improving the efficiency of tax collection by building the capacity of the South African Revenue Service and strengthening policies to reduce fiscal leakages is, thus, key,” the authors said.

Bloomberg reported that South Africa may be forced to revise its tax increase targets as its budget shortfall is set to breach wartime levels for a second consecutive year.

Finance minister Tito Mboweni is expected to present the national budget speech later this month.

Read: South Africa’s economic recovery depends on these factors – including dealing with a third Covid-19 wave

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3 key recommendations to stimulate South Africa’s economy